The dividend rate is the stated annual rate an account pays before compounding. APY, or annual percentage yield, shows the total amount you could earn in one year after including compounding.
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For comparing savings accounts, money market accounts and credit union share accounts, APY is usually the more useful number because it shows the annual return under the account's stated terms.
Dividend Rate vs. APY at a Glance
| Feature | Dividend rate | APY |
|---|---|---|
| What it measures | The account's stated annual rate | The annual return after compounding |
| Includes compounding? | No | Yes |
| Commonly used by | Credit unions | Banks and credit unions |
| Best use | Understanding the base rate | Comparing account earnings |
| Typical relationship | Usually lower than APY when compounding applies | Usually equal to or higher than the stated rate |
Credit unions generally use dividend rate for the rate paid on share accounts. Banks commonly use interest rate for the equivalent base rate.
Under federal disclosure rules, the dividend or interest rate does not include compounding. APY includes both the stated rate and how often the account compounds.
What Is a Dividend Rate?
A dividend rate is the annual rate a credit union states for a savings account, share account, money market account or share certificate.
For example, a credit union might advertise:
- Dividend rate: 5.00%
- APY: 5.12%
The 5.00% dividend rate is the account's base annual rate. It does not include the extra earnings that result when dividends are added to the account and then earn more dividends.
A dividend rate can be variable. If it is, the credit union can change it according to the account agreement and applicable rules. Credit union dividends are payments to members based on the account and the credit union's declared rate.
What Is APY?
APY stands for annual percentage yield. It measures how much an account would earn over one year when compounding is included.
The APY calculation considers:
- The account's stated dividend or interest rate
- How often earnings compound
- The assumption that the money stays deposited for the full period
- No deposits or withdrawals during the calculation period
Federal rules define APY as an annualized rate based on the interest paid and the compounding schedule over a 365-day period.
Example: Why APY Can Be Higher Than the Dividend Rate
Suppose you deposit $1,000 in an account with:
- Dividend rate: 5.00%
- Monthly compounding
- No deposits or withdrawals
If the 5.00% rate compounds monthly, the APY is approximately 5.12%. After one year, you would earn about $51.16, assuming the rate stays unchanged.
The difference comes from the way compounding works. Each month's earnings are added to the balance, so later earnings are calculated on the original deposit plus the earnings already credited to the account.
Which Number Should You Use to Compare Accounts?
Use APY when comparing accounts.
APY lets you compare potential earnings between accounts with different compounding schedules. The Federal Deposit Insurance Corporation also identifies APY as the better comparison figure because it includes the effect of compounding.
| Account | Dividend or interest rate | Compounding | APY |
|---|---|---|---|
| Account A | 5.00% | Annually | 5.00% |
| Account B | 5.00% | Monthly | Approximately 5.12% |
| Account C | 4.90% | Daily | Approximately 5.02% |
Under these assumptions, Account B produces the highest return because it compounds monthly, even though Accounts A and B have the same stated rate.
What Else Should You Check Besides APY?
APY is the best starting point, but it does not show every account cost or condition.
Before opening an account, check:
- Minimum balance requirements
- Monthly maintenance fees
- The minimum balance needed to earn the advertised APY
- Whether the rate is fixed or variable
- Withdrawal or transfer restrictions
- Early withdrawal penalties for certificates
- Whether the APY includes a temporary promotional rate
- Whether bonuses or rewards have separate conditions
APY usually includes interest or dividends and compounding, but it does not necessarily include every bonus, fee or account condition. Account disclosures may also say that the advertised APY assumes earnings remain on deposit until maturity.
Can the Dividend Rate and APY Be the Same?
Yes. The dividend rate and APY can be the same when the account compounds annually or when the difference rounds to zero.
For example, an account with a 5.00% rate that compounds annually may show a 5.00% APY. With more frequent compounding, the APY is usually slightly higher than the stated dividend rate.
Some long-term, noncompounding share certificates have unusual APY calculations. The National Credit Union Administration notes that, in certain cases, the APY for a noncompounding certificate with a term longer than one year can be lower than the stated dividend rate.
Bottom Line
Compare APY first when reviewing savings accounts or credit union share accounts. Then check the fees, balance requirements, withdrawal restrictions and whether the advertised rate can change.